Mr. Irony

San Diego  June was nirvana for both lovers and haters of securities-fraud attorney Bill Lerach. Admirers exulted that super-banks J.P. Morgan and Citigroup agreed to shell out a combined $4.2 billion for their roles in the Enron scam; Lerach is head lawyer in the cases. His detractors gloated that Lerach and his former law firm are unstated targets in a federal indictment of Seymour Lazar, a retired Palm Springs lawyer. Lazar is charged with taking illegal kickbacks for being a plaintiff, or aggrieved investor going to court, in more than 50 securities lawsuits over two decades.

The suit says that Lazar took the kickbacks from "a New York law firm with principal offices in New York and California." The firm, now named Milberg Weiss Bershad & Schulman, left no doubt it was cited when it complained that it was "unfairly implicated" and was "outraged" to be connected with "baseless" charges.

Lerach's name used to be on the tail end of that firm. There was a breakup last year, and Lerach now is chairman of Lerach Coughlin Stoia Geller Rudman & Robbins. Lerach, considered the most feared lawyer in the United States, admits the government is chasing him. His high-powered San Francisco-based lawyer, John Keker, said that the Lazar transactions were "common and legal" and that Lerach has done more to protect shareholders than the Securities and Exchange Commission and Department of Justice combined. "The non-existent facts in this case raise the troubling question as to why the Bush Justice Department is focusing attention on the firms who fight on behalf of shareholders and pension funds," said Keker in a statement.

And that goes to the essence of the matter -- what the lawyers call the gravamen. Have Bill Lerach and his colleagues gone too far in pursuing corporate fraud? Or is the federal bureaucracy, which won't police securities abuses sufficiently, working with corrupt corporations to thwart Lerach and his fraud busters?

The unequivocal answer: yes and no. Lerach has used abusive techniques to thwart abusive practices that are unethical but may be technically legal. At the same time, the structure and enforcement of securities laws favor the plutocrats, who control the weak-kneed regulators by lining the pockets of their bosses, the politicians.

The case against Lerach was laid out September 4, 2000, by Fortune magazine. Calling Lerach a "belligerent, vengeful, foul-mouthed bully," the magazine described how the San Diego lawyer focuses on a company whose stock has dropped. He sues it for securities fraud, noting that insiders touted expected good news and sold their stock. Then came bad news and the stock's plunge. Companies usually settle.

In my opinion, Lerach has been zeroing in on an ethical problem: companies go public with insiders getting their shares for pennies; they tout the stock and dump it for huge profits; when the company flops and the stock drops, outside investors hold the bag. Corporate securities lawyers say that if the company files the right forms -- that is, warns investors in convoluted legalese that they will get screwed -- then the lawsuits are frivolous. I suspect that the moral malodor of this strategy causes the companies to settle.

The Fortune article said Alan Schulman, a then-Milberg Weiss partner who now practices in San Diego with another firm, believed Lerach was "reckless," "vindictive," and "dangerous" and would ultimately ruin the firm. But Milberg's head, New York's Melvyn Weiss, wouldn't rock the boat at that time, and Schulman departed. (Lerach, Schulman, and an official of Lerach Coughlin would not return calls for interviews.)

From the 1970s to the mid-1990s, the plaintiff law firm that filed the first case in a securities-fraud suit usually got to be lead counsel -- an enormous advantage. "All the impetus was to file first and ask questions later," says San Diego attorney James Krause. "They [Milberg Weiss] filed a lot of suits the day after a stock went down, according to congressional testimony."

In this environment, there would have been motivation to have a cozy relationship with a plaintiff who owned a few shares of a lot of stocks and could file suits quickly. "It's very possible their [Milberg Weiss's] people were doing it, but I doubt Bill Lerach had knowledge of what was going on," says San Diego attorney Jeffrey Krinsk. "It's going to be an enormous struggle for the Milberg and Lerach firms to survive this."

In 1995, purported federal tort reform legislation changed the rules: now the role of lead counsel doesn't go to the firm filing first but to the firm representing the client with the biggest losses. Therefore, the federal government in the Lazar suit is beating a dead horse. "The practice of rushing to be the first to the courthouse ended a decade ago," says Frank Partnoy, law professor at the University of San Diego. "The media and people should be careful not to rush to judgment about Lerach. He has done some great things. Before Enron, the federal government did very little to prosecute financial fraud." Private litigation lawyers like Lerach "stepped up when the government was not there." Lerach did an excellent job on the complex Enron case, says Partnoy.

San Diego lawyer Frederic J. Milberg, whose father cofounded Milberg Weiss, worked under Lerach at the firm from 1976 to 1981. "I don't know what the government's intentions are, but to me this is a vendetta by the government, because the Republicans ran on a platform in favor of corporations," says Milberg. During his years at the firm, "I was certainly not aware of any improper payments, nor did my father mention anything like that to me." Even if such payments were made, it should really be an ethical matter for the state bar, not for a criminal grand jury, Milberg says.

"Bill Lerach is a brilliant man who works harder than any man I have ever met," says Marisa Janine-Page, a former lawyer at Milberg Weiss. "He doesn't just jump in and file a case. He does his due diligence before filing."

Because of his coarse and abrasive style, as well as the money he amassed chasing corporations, Lerach became the dartboard as Congress pursued 1995's Private Securities Litigation Reform Act. Krause remembers reading cartons of congressional testimony pointing to so-called abuses by Milberg Weiss and Lerach. The 1995 act "was a bill of attainder against Bill Lerach. He really pissed off too many people," a Silicon Valley lawyer told Fortune.

But Lerach and Milberg Weiss eventually prospered, because they had the manpower and reputation to get the large clients. "The so-called reform act was actually a wholesale assault on investor rights," says city attorney Mike Aguirre, who specialized in securities fraud before getting elected to his current post. "The attorneys alleged to have engaged in the worst abuses have prospered and grown wealthier after the reform act."

Ironies abound. Janine-Page points out that largely because of the 1995 reform act, John Moores, who sold off almost half a billion dollars' worth of Peregrine Systems stock during a period in which the books were cooked, has thus far flown under the regulators' radar. Moores is a friend of Lerach's. The act has permitted judges to let Moores and other purported outside directors skate in civil litigation, despite overwhelming evidence of negligence and insider trading.

However, the news may be improving. This spring, a superior court judge made an astonishing ruling that a case against former Peregrine directors would have to be tried under Delaware law because the corporation was based there. The plaintiffs filed a writ with the appellate court to reverse the decision. The California attorney general's office told the appellate panel that it strongly protested the judge's ruling. Recently, the appellate court ruled that the judge will have to show cause why she made the decision. It's a step in the right direction, although Aguirre says "we will need a miracle" to swing the nation back to the societal insight that engendered the tough antifraud securities laws that were enacted in the early 1930s.